By Jeff Sutherland and Tom Hancock (Bloomberg) –
The blow from China’s energy crisis begins to spread around the world, hurting everyone, from Toyota Motor Corp. Australian sheep farmers and cardboard box manufacturers.
The extreme power shortage caused by soaring coal prices at the world’s largest exporter is expected to hurt China’s growth, and the impact on supply chains could cripple a struggling global economy. the pandemic.
The timing couldn’t be worse, with the shipping industry already facing congested supply lines delaying deliveries of clothing and toys for the holiday season. It also comes just as China begins its harvest season, raising concerns about significantly higher grocery bills.
“If electricity shortages and production cuts continue, they could become another factor causing global supply problems, especially if they start to affect the production of export products,” said Louis Kuijs, Senior Economist for Asia at Oxford Economics.
Economists have already warned of slowing growth in China. At Citigroup, a vulnerability index indicates that exporters of inputs to the Chinese manufacturing sector as well as raw materials are particularly threatened by the weakening Chinese economy. Neighbors like Taiwan and Korea are sensitive, as are metal exporters like Australia and Chile, and major trading partners like Germany are also somewhat exposed.
For global consumers, the question is whether manufacturers and retailers will absorb the higher costs or pass them on.
“It sounds like another stagflationary shock to the manufacturing sector, not just to China but to the world,” said Craig Botham, chief economist for China at Pantheon Macroeconomics. “Price increases are now fairly widespread – a consequence of China’s deep involvement in global supply chains. “
Beijing has ordered coal mines to increase production and is scouring the world for energy supplies in an attempt to stabilize the situation. The impact on the global economy will depend on how quickly these efforts pay off. Many Chinese factories have cut production for this week’s “Golden Week” holiday, and economists are watching closely whether power shortages will return as they intensify.
Due to a firm response from the Chinese government, “the worst of this energy crisis – but not the whole crisis – may be over soon,” Societe Generale SA economists said in a note on Friday. Still, restrictions on energy use in the most energy-intensive industries such as steel, aluminum and cement will persist for months and China will continue to aggressively target natural gas imports, adding to the pressures on world prices, they said.
Some industries are already under pressure and the damage they see could spread to other sectors.
Think about paper. The production of cardboard boxes and packaging materials was already strained by soaring demand during the pandemic. Now, temporary shutdowns in China have hit production even harder, leading to a possible 10-15% reduction in supply for September and October, according to Rabobank. This will add further complications to businesses already suffering from the global paper shortage.
The food supply chain is also at risk as the energy crisis makes the harvest season more difficult for the world’s largest agricultural producer. Global food prices have already reached a decade high and concerns are growing that the situation is worsening as China struggles to manage crops ranging from corn and soybeans to peanuts and cotton.
In recent weeks, several factories have been forced to shut down or scale back production to save electricity, such as soy processors who crush beans to produce flour for animal feed and oil for cooking. Fertilizer prices, one of the most important parts of farming, are skyrocketing, slamming farmers who are already giving in to the pressure of rising costs.
The processing industry is expected to be hit more severely than commodities such as grains and meat, Rabobank analysts wrote in a report this week. In the dairy sector, power outages could disrupt the operation of milking machines, while pork suppliers will face pressure from a smaller supply of cold storage.
Australian sheep farmers outside of China are bracing for weaker demand as they seek to auction their wool. The industry has seen Chinese factories cut production by up to 40% due to power cuts last week, Australian Broadcasting Corp. reported.
The tech world could also take a dramatic hit, given that China is the world’s largest production base of gadgets, from iPhones to game consoles, and a major hub for the packaging of semiconductors used in manufacturing. automobiles and appliances.
Several companies have already experienced downtime at their Chinese facilities to comply with local restrictions. Pegatron Corp., a key Apple partner, said last month it had started adopting energy-saving measures, while ASE Technology Holding Co., the world’s largest chip conditioner, halted the process. production for several days.
The overall impact on the tech sector has so far been limited due to the usual closures around weeklong vacations. If the energy crisis worsens, it could affect production ahead of the crucial end-of-year buying season. Industry giants including Dell Technologies Inc. and Sony Group Corp. can hardly afford another supply shock after pandemic-induced turmoil fomented a global chip shortage that will last until 2022 and beyond.
Any further deterioration in the semiconductor market would also add headaches to automakers, which have already seen production cut back due to the chip shortage. Industry, which ranks high on the list of protected sectors in a period like this, has so far been largely untouched by the effects of the electricity crisis.
Yet there have been a few isolated cases. Toyota, which produces more than one million vehicles a year in China at factories centered around Tianjin and Guangzhou, said some of its operations had been affected by power shortages.
–With help from Jasmine Ng, Debby Wu and Peter Vercoe.
© 2021 Bloomberg LP